Ivo JenikApril 29, 2019

REGULATORY SANDBOXES FOR EFFECTIVE FINANCIAL INCLUSION

Afriadi Hikmal | CGAP Photo Contest

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Ivo JeníkFinancial Sector Specialist

(CGAP)

Speaker

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Agenda

12:00 Introduction

12:10The Importance of Innovation in Financial

Inclusion

12:15 Changing Paradigm(s) in Financial Regulation

12:20 Regulatory Sandboxes Around the World

12:55 Regulatory Sandboxes & Financial Inclusion

13:10 Q&A

The Importance of Innovation

in Financial Inclusion

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Poor people can access and use the financial services

they need to advance their lives

Financially

Excluded:

No basic account

Limited access to

formal financial

services

Cash economy

Opens

transaction

Account

Remittances

Financially

Included:

Has transaction

account

Wide range of

suitable

financial services

Can seize

opportunities and

build resilience

Savings

Credit

Payments

Insurance

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WHAT IS FINANCIAL INCLUSION:

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2017

43%

2017

70%

Source: 2017 Findex

ACCESS

Since 2011, the share of adults with an account has grown

steadily, bringing 1.2 billion more people into the financial

system

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© Copyright Toronto Centre 2018. All rights reserved

USAGE RATES LAG

Although access is growing, high account dormancy remains a challenge

Source: Sub-Saharan Africa: CGAP estimate, Findex and GMSASouth Asia: Findex 2017

2017

49%2017

45%

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ACCESS TO USAGE

To improve account usage, financial services

need to be:

Convenient Responsibly

delivered

Meet the

needs of

customers

Affordable

for customers

Sustainable

for providers

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Getting closer to clients

through digital channels

Offering flexibility in

service availability

Offering tailored services

Reducing direct and

indirect costs and obstacles

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Digital financial services offer new ways to

bridge the financial inclusion gap by …

The Importance of Regulatory

Adaptation is Increasing

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Integrity

Stability

Consumer

protection

Inflation

Inclusion

New threats

Globalization

Technology & Innovation

New entrants

Changing legal &

regulatory framework

Coordination

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Regulators Need to Adapt

Ability to adapt is proportionate to regulator’s

flexibility, which is constrained by:

Degrees of discretion allowed by laws

Resources (staff, time, money)

Liability (incentivizing risk aversion)

Political support (incentivizing risk aversion)

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Regulation Also Needs to Adapt

Rules for the

financial sector

were framed

for this kind of

game

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Regulation Also Needs to Adapt

Now it looks more like this.

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Regulators need to find ways to

deal with rapid change and

leverage the opportunities

offered by innovation to achieve

their mandatory objectives

Problem Statement

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Regulators want to learn about emerging technology and

how to manage fintechs

Source: CGAP/World Bank survey (2019)

Need to deal with growing

fintech industry

Desire to learn about

emerging innovations

Drive competition in the

market

Desire to attract more

innovators

Follow the example of others

Other

What is a Regulatory

Sandbox?

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Innovation Hub

UK FCA launches

Project Innovate

“Test and Learn”

Philippines begins ad hoc

registration of e-money

issuers

“Test and Learn”

Bank of Tanzania begins

to allow mobile network

operators to offer

payments

Proportionate

Regulation

Nigeria announces tiered

KYC regimeProportionate

Regulation

Mexico announces

tiered KYC regime

Principles-based

Regulation

UK Financial Services

Authority announces

commitment to principles-

based financial regulation

2005

2007 2011

2008 2014

20152013

2012

Project Catalyst

US Consumer

Financial Protection

Bureau

A familiar concept

UK FCA Regulatory

Sandbox

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A formal regulatory initiative:

- to test new products, services, or business models live in the marketplace

- on a time- and scope-limited basis

- in order to determine the appropriate regulatory treatment or status

- to safely operate in the marketplace going forward

A sandbox is not:

• a permanent license to operate

• a “free pass” to operate without regulatory oversight or supervision

• required when the regulatory status of an innovative product can be determined without live testing in the marketplace

• a venue for testing the viability of new business models or attracting new customers

Learner’s Permit

Clinical Trial

What is a Regulatory Sandbox?

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Innovation Promoting Policy Promoting Thematic

1 2 3

• Encourage new market

entrants

• Reduce initial cost of

regulation

• Validate new business

models and technologies

• Often cohort-based and/or

linked to other market

development initiatives

• Identify regulations that

inhibit beneficial innovation

• Encourage policy

modernization

• Open application with few

participants – focus on

resolving regulatory frictions

prior to reaching sandbox

• Leverage sandbox for (i)

promoting specific innovations

(i.e., SME finance) or (ii)

accelerating adoption of

regulatory enablers (i.e.,

eKYC, QR codes, etc.)

Sandbox models

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Regulators learn

about new innovations

Innovators incur less

cost associated with

legal fees

Incumbents &

FinTechs can legally

test new products &

services

FinTech x FinServ

partnerships are easier in

collaborative environment

Bad innovations

are stoppedGood innovations

are replicated

Review & Adapt

Regulations based

on experience

Scale successful

products & services

Ideal Scenario: Win-Win

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Benefits of Regulatory Sandbox

Lowers cost of innovation

Opens access to regulator

Formal framework for safe, live testing

Market monitoring

Signaling

For more information click here.

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Key Benefit: Open communication &

guidance

Source: CGAP/World Bank survey (2019)

0

2

4

6

8

10

12

14

16

18

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Guidance Waivers PhysicalInfrastructure

Funds

What services does your organization offer to providers accepted into regulatory sandbox?

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Risks of Regulatory Sandbox

Competition issues (picking winners, uneven

playing field)

Limited capacity of regulator to run sandbox

Liability issues in case of failed testing

Missing options for exit

Fragmentation of regulatory regimes nationally

and internationally

Coordination issues

For more information click here.

Regulatory Sandboxes

Around the World

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Regulatory Sandboxes Around the WorldAs of March 28th 2019

Countries with operational regulatory sandbox

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Countries with operational regulatory sandbox

Countries implementing regulatory sandbox

Regulatory Sandboxes Around the WorldAs of March 28th 2019

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Civil law-based countries

Common law-based countries

Regulatory Sandboxes Around the WorldSource: Wikipedia

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Diversity of regulatory sandboxes revolves around several

design components

Objectives

(promote innovation,

competition, consumer

convenience, inclusion)

Eligibility

(incumbents, fintechs,

innovators)

Safeguards &

other restrictions

(AML/CFT, disclosure,

complaints handling,

limited scale)

Timing for

applications & tests

(cohorts, rolling,

3 – 24 months)

Costs

(application fees,

licensing fees,

testing costs)

Post-test options

(license, cease-and-

desist, regulatory

change)

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Diversity of regulatory sandboxes revolves around several

design components

Objectives

(promote innovation,

competition, consumer

convenience, inclusion)

Eligibility

(incumbents, fintechs,

innovators)

Safeguards &

other restrictions

(AML/CFT, disclosure,

complaints handling,

limited scale)

Timing for

applications & tests

(cohorts, rolling,

3 – 24 months)

Costs

(application fees,

licensing fees,

testing costs)

Post-test options

(license, cease-and-

desist, regulatory

change)

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?

Motivations vs. mandates

Source: CGAP/World Bank survey (2019)

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Diversity of regulatory sandboxes revolves around several

design components

Objectives

(promote innovation,

competition, consumer

convenience, inclusion)

Eligibility

(incumbents, fintechs,

innovators)

Safeguards &

other restrictions

(AML/CFT, disclosure,

complaints handling,

limited scale)

Timing for

applications & tests

(cohorts, rolling,

3 – 24 months)

Costs

(application fees,

licensing fees,

testing costs)

Post-test options

(license, cease-and-

desist, regulatory

change)

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Diversity of regulatory sandboxes revolves around several

design components

Objectives

(promote innovation,

competition, consumer

convenience, inclusion)

Eligibility

(incumbents, fintechs,

innovators)

Safeguards &

other restrictions

(AML/CFT, disclosure,

complaints handling,

limited scale)

Timing for

applications & tests

(cohorts, rolling,

3 – 24 months)

Costs

(application fees,

licensing fees,

testing costs)

Post-test options

(license, cease-and-

desist, regulatory

change)

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Are sandboxes creating loopholes?

Disclosure requirements

Limits on # of clients

Complaints handling

mechanism

Limits on funds received from

clients

AML/CFT rules

Limits on # of transactions

Fit & proper assessment

Minimum capital

requirements

Compensation scheme

Source: CGAP/World Bank survey (2019)

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Diversity of regulatory sandboxes revolves around several

design components

Objectives

(promote innovation,

competition, consumer

convenience, inclusion)

Eligibility

(incumbents, fintechs,

innovators)

Safeguards &

other restrictions

(AML/CFT, disclosure,

complaints handling,

limited scale)

Timing for

applications & tests

(cohorts, rolling,

3 – 24 months)

Costs

(application fees,

licensing fees,

testing costs)

Post-test options

(license, cease-and-

desist, regulatory

change)

© CGAP 2018

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Diversity of regulatory sandboxes revolves around several

design components

Objectives

(promote innovation,

competition, consumer

convenience, inclusion)

Eligibility

(incumbents, fintechs,

innovators)

Safeguards &

other restrictions

(AML/CFT, disclosure,

complaints handling,

limited scale)

Timing for

applications & tests

(cohorts, rolling,

3 – 24 months)

Costs

(application fees,

licensing fees,

testing costs)

Post-test options

(license, cease-and-

desist, regulatory

change)

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37Source: CGAP/World Bank survey (2019)

Issued firm a license

Change of regulation

Required a firm to

change their business

model

Required a firm to exit

the test early

Where do sandbox tests lead?

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What Technology Gets Tested?

Source: CGAP analysis (2019)

AI 2%

Blockchain & Crypto

25%

Data Analytics

16%

Digital ID11%

Online Distribution

8%

Multiple7%

Other31%

Global Sandbox Participants (by technology innovation)

© CGAP 2018

39Source: CGAP analysis (2019)

What Sectors are Most Innovative?

Advice7%

Asset Management

7%

Insurance 5%

Lending 6%

Other 10%

Payments31%

Savings5%

Wholesale & Infrastructure

29%

Global Sandbox Participants (by sector)

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Recent Trends: Global and Regional Initiatives

ASEAN Financial

Innovation Network

• Cross-border, open API

sandbox (APIX)

• MAS, World Bank, IFC

• ASEAN Bankers

***

Global Financial

Innovation Network

• 25 Regulators

• 4 IGO observers

• RegTech projects

• Cross-border testing

***

LatAm Financial

Innovation

Network?

EU FinTech Lab

Pan-African

Innovation

Network?

Do regulatory sandboxes

bring more financial

inclusion?

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Pro-Financial Inclusion BenefitsSeveral hypotheses

Improve capacity of regulators to balance innovations

with I-SIP objectives

Promote innovation that improves financial inclusion

(as demonstrated by past examples – though not

tested in a sandbox)

New, affordable products or services (BitPesa)

Distribution channels (AliPay)

Operational efficiencies (Yu’e Bao)

Business models (PayGo)

Compliance and risk management (iProov)

Increased competition

For more information click here.

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Promoting Financial Inclusion

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44Source: CGAP analysis (2019)

Our Estimate of Number of Innovations

Relevant to Financial Inclusion

No80%

Yes20%

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45Source: CGAP analysis (2019)

Our (Generous) Estimate of Number of

Innovations Relevant to Financial

Inclusion

No62%

Yes20%

Maybe18%

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Implementation Risks Several hypotheses

Stretches regulatory capacity

Regulatory procrastination

Inadequate institutional arrangements

New risks associated with products and services

Disproportionate distribution of benefits to already

included segments

For more information click here.

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Inclusion-Themed Sandbox

Design Improvements

Identify Key Barriers

Prioritize

Define Expected

Market Change

Define Expected Policy

Change

Design Sandbox

Accordingly

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Sandboxes: One Tool Among Many

Wait-and-See

(liberal)

Test-and-

Learn

(bespoke)

FinTech

License

(legislative)

Regulatory

Sandbox

Structured (a defined process to deal with

innovations)

Permanent (a permanent framework)

Objective driven (implementation driven

by defined objectives)

Open access (objective and transparent

criteria determine access)

Parameterized test (restrictions and

safeguards in place)

Mutual learning (intense dialogue

between the regulator and innovators)

Note: The listed examples of tools are only illustrative and cannot be considered exhaustive.

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Wait-and-SeeMonitor a trend to understand it better before any intervention

P2P Lending in ChinaExamples of policy interventions

Source: Aveni and Jenik. 2017.

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Test-and-LearnA bespoke framework to test a new idea in a live environment

Bangko Sentral ng Philipinas

2004

Permitting non-banks to pilot e-money with

safeguards and reporting requirements in place

2009

E-money regulations adopted

Today

T&L approach used to test various innovations

from payments agents to e-KYC

For more information click here.

In Summary

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Regulatory Sandbox: Summary

1. One out of several other options

and not an exclusive point of entry

for innovation

2. Not a regulatory loophole

3. Tweaks to improve impact on

financial inclusion possible

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Kate Lauer, CGAP

Ivo Jenik, CGAP

ijenik@worldbank.org

CGAP Working Paper

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• BCBS (Basel Committee for Banking Supervision). 2017. “Sound Practices:

Implications of fintech developments for banks and bank supervisors.”

• Boor et al. 2014. “Users as innovators in developing countries: The global sources of

innovation and diffusion in mobile banking services.”

• CGAP. 2017. “Regulatory Sandboxes and Financial Inclusion.”

• Duff, S. 2017. “Modernizing Digital Financial Regulation.”

• FSB (Financial Stability Board). 2017. “Financial Stability Implications from FinTech:

Supervisory and Regulatory Issues that Merit Authorities’ Attention.”

• FCA (Financial Conduct Authority). 2015. “Regulatory Sandbox.”

• IOSCO. 2017. “Research report on financial technologies (FinTech).”

• Mueller, J. 2017. “FinTech: Considerations on How to Enable a 21st Century Financial

Services Ecosystem.”

• Zetzsche D., et al. 2017. “Regulating a Revolution: From Regulatory Sandboxes to

Smart Regulation.”

Key Resources

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Thank you To learn more, please visit

www.cgap.org

ijenik@worldbank,.org

@IvoJenik

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